Q1 2022 Brown & Brown Inc Earnings Call
Okay.
Please standby we are about to begin.
Good morning, and welcome to the Brown <unk> Brown, Inc. First quarter earnings call today's call is being recorded please.
Please note that certain information discussed during this call, including information contained in the slide presentation posted in connection with this call.
And including answers given in response to your questions may relate to future results and events or otherwise be forward looking in nature, such statements reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the first quarter and are intended to.
All within the Safe Harbor provisions.
All of the security laws actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward looking statements made as a result of a number of factors such factors include the company's determination as it finalizes.
Its financial results for the first quarter.
Its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday.
Other factors that the company may not have currently identified or quantified.
And those risks and uncertainties identified from time to time in the Companys reports filed with the Securities and Exchange Commission.
Additional discussion of these and other factors affecting the company's business and prospects.
As well as additional information regarding forward looking statements is contained in the slide presentation posted in the connection with this call and in the company's filings with the Securities Exchange Commission, we disclaim any intention or obligation to update or revise any forward looking statements whether as a result of new information future.
Or events or otherwise.
In addition.
There are certain non-GAAP financial measures used in this conference call.
All reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measures can be found in the company's earnings press release or in the Investor presentation for this call on the company's website at Www Dot BB insurance dotcom.
Clicking on the Investor Relations and then calendar of events.
That said I will now turn the call over to Powell Brown, President and Chief Executive Officer, you may begin.
Thank you Jake and good morning, everybody and thanks for joining us for our first quarter 2022 earnings call. We delivered another good quarter and are very pleased with our top and bottom line performance. Our consistently high level of performance is driven by our unique culture, whereby approximately 22% of our company's own.
By teammates.
Since our call on March eight we have made good progress and are very excited about G. R. P. B D b and orchid, becoming part of the Brown in Brown team.
There are additional capabilities and talented teammates will enhance the solutions, we deliver to our customers globally.
After that call on the eighth Barrett Brown, Scott Penny and I spent two weeks traveling around the U K and Ireland and met with over a thousand of our soon to be new teammates and visited over 20 locations.
Two weeks of engaging with the G. R. P. M. P. D. B teams, we are even more confident amount and confident about the cultural alignment and are more optimistic about the future.
As an update on closing the deals we're very excited about the closing of orchid.
At the end of March for G. R. P and B D. B, we continue to anticipate closing these acquisitions during the third quarter Lastly, we completed the financing for these transactions and Mark March. In addition, we published our annual report ESG report and proxy statement, we encourage everyone to review these documents.
As each report highlights our key aspects of our strategy our commitment to our ESG initiatives and our philosophies around executive compensation now lets transition to the results for the quarter I'm on slide four we delivered $905 million of revenue growing 11% in total and seven 8% organically with good new business and solid.
<unk>, our adjusted EBITDA margin was strong and remained consistent with the first quarter of 2021, our net income per share for the first quarter was 77 cents on an as reported basis and 78 on an adjusted basis later in the presentation, Andy will discuss our financial results in more detail.
We completed two acquisitions during the quarter with annual revenues of approximately $65 million with orchid being the majority of that amount in summary, we're very pleased with our strong performance for the first quarter I am now on slide five from.
From a customer and market perspective businesses continued to expand and the economy grew albeit slower at a slower rate than last year, we're seeing some customers beginning to realize initial relief and supply chain issues experienced over the last two years. The main challenge challenges business leaders are managing today or the ability.
To find enough workers inflation and rising interest rates. These are putting pressure on margins for many companies across multiple industries and are influencing how leader invest in their company.
From a carrier standpoint, the themes remain fairly consistent as compared to Q1 of 'twenty, one and previous quarters, which includes the availability of limits for certain classes heightened pricing sensitivity and increased underwriting rigor for cyber liability and customers with high losses, Consequently customers continue to mark.
If either deductibles and limits to best manage their premium increases.
Admitted market rate increases were similar to prior quarters and were up 3% to 7% across most lines with the outlier being workers' compensation rates, which continue to be down 1% to 3%.
From an E&S perspective rate increases continued to be in the range of 10% to 20% Cat property, both wind and quake were up 10% to 30% with some year over year moderation experienced an earthquake rates a topic. That's on the minds of many carriers as insurable values as property prices and replacement cost.
Costs have increased materially over the past couple of years professional liability for most accounts remained very challenging with rates up 10% to 20% regarding cyber.
Rates and deductibles continue to increase with carriers, requiring effective security protocols in order to obtain coverage.
For professional liability in excess umbrella the themes are consistent with previous quarters, California, and Florida personal property placements are becoming even more challenging due to the past losses in aggregate concentrations.
And we expect the appetite for personal lines in those cat prone areas will continue to be constrained this year.
With that said, we are well positioned to help our customers find creative solutions I am now on page six lets transition to discuss the performance of our four segments.
Now retail national programs in Wholesales wholesales segments delivered another strong quarter with organic revenue growth of 8961, and 11 six respectively. The performance of these segments was fueled by a combination of new business, good retention rate increases and modest exposure unit improve.
<unk>.
The organic revenue for our services segment decreased six 2% for the quarter with the main driver being fewer weather related claims. This year now let me turn it over to Andy to discuss our financial performance in more detail great. Thank you Paul Good morning, everybody. We're over on slide number seven like previous quarters, we are going to discuss our GAAP results and then.
Certain non-GAAP financial highlights for the first quarter, we delivered 11% total revenue growth organic revenue growth of seven 8%. Our net income grew 10, 3% or $26 million and our diluted net income per share increased by 10% to 77.
The effective tax rate increased to 16, 9% for the first quarter of this year as compared to 16, 5% in the first quarter of last year. The higher rate was primarily impacted by the change in the tax benefit associated with shares vesting from our stock incentive plans, we continue to anticipate our full.
Year effective tax rate will be in the 24% 25% range.
Our weighted average number of shares increased slightly compared to the prior year and our dividends per share increased to $10, three or 10, 8% compared to the first quarter of 2021.
We're on slide number eight this slide presents our results on an adjusted basis previously our adjusted measures only excluded the change in earn out payables beginning this quarter, we refined our adjusted measures to isolate the impact of movements in foreign currencies on both revenues and operating costs as.
Well as to remove the net gain or loss on disposals. In addition, we're removing the nonrecurring acquisition and integration costs associated with ERP BTB, an orchid due to the materiality of these cost we anticipate excluding the cost for these acquisitions for the next 18 to 24 months.
Please refer back to slides 15, and 16 for a reconciliation of these amounts to our most comparable GAAP measures.
On an adjusted basis income before income taxes increased by 11, 7% EBIT grew by 11, 1% with consistently strong year over year margins, even with higher variable costs over the prior year and our net income increased by 11, 3%.
From an expense standpoint, our first and second quarters are probably our toughest year over year comparisons as travel and entertainment were increasing in the second half of last year. Our adjusted diluted net income per share was <unk> 78, which grew by 11, 4% in summary, it was another great quarter on the top and bottom line.
We're over on slide number nine.
Our retail segment delivered adjusted total revenue growth of 14, 2% driven by acquisition activity over the last 12 months and organic revenue growth of eight 9% with solid growth across all lines of business.
Adjusted EBITDA grew 18, 4% with the associated margin, increasing by 130 basis points for the quarter, which was driven by leveraging organic revenue growth and managing our expenses, even with increased variable operating cost.
Moving over slide number 10, our national programs segment delivered adjusted total revenue growth of four 7% and organic revenue growth of six 1% with strong growth across many programs. The difference between adjusted total revenues organic revenues was driven by slightly lower contingent commissions and the sale.
Although the program in the prior year adjust.
Adjusted EBITDAX was substantially in line with the prior year with the associated margin declining by 170 basis points to 33, 2% as a result of increased variable expenses higher noncash stock based compensation and the timing associated with recognizing revenues and costs related to new customers.
We're over on slide number 11, our wholesale brokerage segment delivered adjusted total revenue growth of 13, 2% driven by acquisitions in the past 12 months and organic revenue growth of 11, 6% adjust.
Adjusted EBITDAX increased by 23, 2% with the associated margin improving by 260 basis points as a result of strong organic revenue growth and higher contingent commissions despite increased variable cost.
Over on to slide number 12, adjusted total revenues in our services segment decreased by seven 2% and organic revenue declined by six 2% due to fewer weather related claims as compared to the prior year for the quarter adjusted EBITDA decreased by $3 million or 25, 2% due to variability in the volume of it.
Weather related claims.
A few comments regarding liquidity and cash conversion as discussed during our Q4 earnings call last year, we have transitioned to a fiduciary reporting model for cash accounts receivable and payables held are owed in a fiduciary capacity the changes to more appropriately reflect the cash flow from operations in the nature.
<unk> of the accounts on our balance sheet on the cash flow statement changes in fiduciary receivables and liabilities are presented within financing activities on the balance sheet. These accounts are labeled as fiduciary assets and liabilities.
Yes.
After delivering another year of strong cash flow in 2021, we started 2022 with a solid performance and delivered cash flow from operations of $104 million our ratio of cash flow from operations as a percentage of total revenues was 11, 5% for the first quarter of this year as compared.
16, 9% in the prior year the ratio of cash flow from operations as a percentage of total revenues was lower than the prior year due to paying higher incentive bonuses to our teammates for their outstanding performance in 2021, and the payment of acquisition earn outs as certain acquisitions have over performed.
Our original expectations.
As a reminder, the first quarter is normally our lowest conversion ratio of the year due to payments of prior year bonuses consistent with our comments at year end post our transition to the fiduciary model a good estimate of full year cash flow from operations as a percentage of total revenues should be in the range of 27% to 28.
Percent barring anything unusual.
As Paul mentioned earlier, we completed the financing for the acquisitions of <unk> ERP BTB, an orchid. The total deployed capital for these acquisitions will be approximately $2 $5 billion.
$2 billion of the purchase price will come from the $1 2 billion of new 10, and 30 year bonds, we issued in mid March, which carry which carry interest rates of four 2% and 495% respectively.
And then $800 million will be sourced for our new bank facility. We finalized at the end of March the remainder of the purchase price will come from cash on hand, as well as cash generated during the first half of this year incremental interest expense for the first quarter was approximately $2 million and we expect interest expense to incur.
Approximately $17 million per quarter going forward as a result of the bonds and bank facilities are excellent capital position and strong cash flows support our strategy to acquire great companies and also enables us to deliver to delever over the coming quarters as we've done in the pack.
After larger acquisitions with that let me turn it back over to Powell for closing comments. Thanks, Andy for a great report. We finished 2021 with significant momentum, which continued into 2022 and that enabled us to deliver another great quarter on top and bottom line performance. We believe economic growth will continue to return to more nor.
Immel levels. However, there are a number of topics that will influence business confidence and economic expansion.
Which are the continued high levels of inflation and rising interest rates. We are also following topics as additional drivers of the economy as one availability of employees across all industries to the resolution of supply chain constraints and three how current global geopolitical matters.
Resolve themselves.
How each of these areas play out over the coming quarters will drive the growth trajectory of the economy.
This will then influence how leaders invest in their businesses and corresponding exposure unit expansion from a rate perspective, we anticipate premium increases for admitted markets will remain relatively constant for the next few quarters for an E&S perspective, we expect premium rate increases for the second quarter to be consistent with levels experienced in the first.
Quarter.
Depending on weather related and other losses incurred over the next few months rates for certain lines may increase further or moderate slightly in the months that follow in states like California, and Florida premiums are becoming very expensive for certain classes. As a result customers are managing expenses by modifying the deductibles.
Or aggregate limits.
On an M&A front regulatory approval for the closing of <unk> and BBB is progressing as expected and we anticipate closing during the third quarter more broadly, we expect competition and valuations to remain at peak levels until interest rates increase materially.
We have a good pipeline, we are actively seeking firms that fit culturally and makes sense financially and we're well positioned to deliver value for our stakeholders.
From an innovation standpoint, we're making good progress to leverage data in order to enhance the customer experience streamline the placement of coverage and create new products. We're also working to implement efficiency tools that will enhance the experience for our teammates. So they can spend more time delivering solutions for our customers.
In closing, we feel great about our business as we continue to expand our capabilities and most importantly about our 12000 plus teammates that will soon be nearly 15000 teammates when G. ERP and BBB are closed we're focused on delivering for our customers writing more new business.
And acquiring great companies as these will be the key drivers of our long term growth with that let me turn it back over to Jake for the Q&A.
Yes.
Ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.
Do keep in mind, if youre using a speakerphone make sure. Your mute function is released so that's a little creature equipment. Once again star one for any questions. We will begin with Elyse Greenspan with Wells Fargo.
Yes.
Hi, Thanks. Good morning. My first question is on the margin you guys had pointed to flat margins for the year.
I know Andy you guys pointed out that you had tougher year over year compared in the first and the second quarter, a teeny starting to increase in the back half of last year.
Margins are flat to start the year does that position you guys see.
<unk> come in better than you originally expected.
Hi, good morning Elyse.
Since we're at the end of the first quarter similar to the comments last year, we'll probably stick with our current guidance for the full year and then let's see how the next quarter or two.
Roundup force, but the.
The fact that we said youll flat could be up slightly down slightly for the full year still seemed like a pretty good range at this stage, but we're very pleased with the first quarter.
Okay, Great and then my second question.
In terms of organic.
We tell you pointed to broad based growth across the different.
Can you give us a sense of how.
Core retail business is doing great benefit in the Q1 and I know last year, you guys showed pretty strong growth in the second quarter and benefit can we think about the year over year compare being top where would you expect.
To show good growth and benefit in the second quarter of this year as well.
So elyse, we're very pleased with the performance of all segments of the business and retail.
And although we don't break out those segments.
We're very pleased with how commercial.
P&C and benefits and personal lines performed in the first quarter and we anticipate that they will perform well in the second quarter.
Okay, and then one last one.
Now the ERP deal you were talking about potentially looking to use that platform to do some other bolt on Neal overseas. Thank.
Since you announced the deal do you have any kind of update on the market that you guys are seeing.
In UK, and Ireland and how that.
Translate into additional M&A opportunities for background.
What I would say Elyse is this.
Obviously, it's a it's a smaller economy in the sense that there are 66 million people there and I think there is 330 million people in United States.
But there are lots of firms that are in the small and medium space.
And the key and G. ERP has been doing this but is to continue to identify firms that fit culturally and make sense financially and so they are actively looking for opportunities and are actually doing transactions at the present time and we anticipate continuing.
Do that but from a standpoint of we don't give guidance as you know in terms of what we're going to buy or what's in the pipeline. We just we don't believe that till it's actually done.
But we do think theres going to be some nice opportunities for us there and we're very excited about it.
And very excited to welcome.
Welcome our soon to be new teammates.
Once we get the approval by the FCA.
Thanks, Paul for the color.
Yes, Thanks Luis.
And next we'll move to a question from Greg Peters Raymond James.
Good morning, everyone.
Good morning.
Al in your comments you talked about.
Inflation supply constraints.
And on my freight war on talent.
Theres definitely seems to be within the insurance brokerage sector.
A lot of attention to the war on talent, we see periodically teams going from one organization to another so maybe you could speak to them to us for a moment about how your producer retention teammate retention is holding up.
And.
Talk to us about the pressures you might be seeing from the wage inflation perspective as it relates to your teammates.
Sure so.
Good morning, Greg and I would tell you that.
Several calls ago I remember talking about the fact that our industry has done a pitiful job of recruiting and developing talent across the platform not one firm or one in one segment of our but just the industry as a whole has not done a very good job.
That's number one number two.
We're seeing as you are lots of people, particularly a lot of movement in the carrier side in my years in the business.
30, plus years in the insurance industry 32, I haven't ever seen at this active on the carrier side.
That said, yes, we are seeing people that are moving.
And sometimes teams are moving to other firms in the brokerage space and what I would tell you is this we talk about cultural fit in terms of acquisitions. We also.
That's embedded in the kind of people that we hire and we look for and so a fundamental core value at Brown <unk> Brown as wealth creation for our teammates.
So as you know all of our teammates have the opportunity to buy stock through an employee stock purchase plan or the equivalent plan at a discount.
And no one's required to do that but we have an ownership culture here. We're 22 plus percent of the company is owned by Brown in Brown teammates and we know at least 65% of our teammates own shares of Brown <unk> Brown, we think it's higher but we know that for a fact, so you have an ownership culture, which is very unusual.
Usual, particularly in our larger public company.
And so the way we think about it is.
People like to be parts of winning teams.
You would like to be a part of a winning team I would like to be part of owning team Andy wants to be part of <unk> team.
And ultimately in a in a decentralized sales and service organization. We believe that we have tapped into something that appeals to a lot of very talented people, which is theres a lot of independents at a local level.
And the kinds of business. They go after but there is a way for them to grow wealth through one if you're a producer and hitting certain revenue targets.
Getting grants and leaders at the same and teammates through discounted share purchases. So.
Do we have turnover and have we had turnover. Yes, we have is that turnover more pronounced today than it was.
Two years ago, and no it's not and that doesn't mean that we are diminishing the impact of it because we don't like to lose teammates.
You know there are talented teammates that sometimes lead brown <unk> Brown, and that's a bummer, but.
We are always looking for people that want to be part of a winning team at Brown <unk> Brown and we believe that we have the right mix of rewards.
And to drive desired behavior that are aligned with our overall company goals.
Got it.
A point of clarification in your answer you talked about the <unk>.
Term churn of talent at the carrier level.
I'm wondering are you seeing any disruptive consequence of that with renewals.
As you think about your total book of business.
Well, let me let me put it this way there's two ways to answer that the answer at a local office level is when you have changed like that if your underwriter leaves there is a disruption doesn't mean you can't work through it it just means that they.
Somebody that may try to re underwrite the account or something like that or ask more questions that if the person that would put the account on the books. They know the account that as an example at a higher level no I would say, we kind of work through it but it is at a desk level. The answer is it dipped.
<unk>.
And in some instances it can be bumpy in some instances it can be more of a smoother transition it just depends.
Got it.
Thanks for the color on that point.
I know this is probably getting out a little bit in front of the process, but.
You reported to us that you spent.
A bunch of time meeting all the colleagues with <unk> and BBB I'm wondering if you can give us.
You are also observing their results.
Give us some perspective of how they performed in the first quarter.
Based on what you've been able to see and.
What I'm.
Zeroing in on which isn't surprising is how their organic how their margin profile how their free cash flow conversion is going to mesh with you and I know you've provided some big picture comments on it before but maybe you could use this opportunity to give us another update.
So let me thank you for the question.
And.
Im going to touch.
Try to touch on that in a very diplomatic way and the reason I say that is number one we havent closed the transaction.
So it's subject to approval by the FCA and as we've said, we believe that would occur in the third quarter. They did have a nice first quarter.
And I'm not going to go.
And the specifics because I don't know all the specifics I know enough.
But this is what I think is important and more and more important to you, but you can't put this in your model.
When I go into the offices and these communities around England and in Ireland. It reminds me of Brown <unk> Brown 20 years ago.
And so for those people that are on the call that understood. What we were like 20 years ago.
We were a very effective sales and service organization, but we continued to just add to our capabilities and improve and grow more organically.
And we've done some cool things in the last 20 years and so I can tell you. This.
I went in a lot of offices and met a lot of teammates in England, and Ireland and their pumps.
And so.
You know, we have a different story than pretty much anybody else out there.
And relative to a public company.
There arent many public companies, let alone in the brokerage space, but any public companies has got 23%, 22% insider ownership by teammates.
So again, we talk about culture part of our culture as an ownership culture, where we put the interest of the customer first and it's based on a foundation of honesty and integrity and when you do that it will always work out for brown around long term.
So you know.
I could go on and on about Mike Bruce and his team in England, and Sylvester <unk> and his team at BBB.
And London I'm going to tell you we are very pleased with the teams.
And our cant wait for them to become officially teammates sometime in the third quarter.
Okay.
And Greg to your question.
Organic and margins.
We'll we'll address the organic once the businesses had been with us, but no change in our previous commentary regarding overall profitability and cash flow conversion for the businesses.
As we said back to the early part of March has a very similar profile of those businesses and the <unk>.
Visions in which they're going to be part of so nothing has changed on that front, we're very.
Very excited about having them be part of the team and the capabilities.
So Andy on that point like cash bonuses and the expenses that go through your cash flow in the first quarter, that's similar to what's going on at <unk> correct.
For the most part yes, there are some different phasing, but nothing substantially different.
Got it thank you for the answers guys.
Thank you.
Well now move to Mark Hughes with tourists.
Yes. Thank you good morning.
Just curious your latest thoughts on the net impact of that.
Volatility, let's say in California, and Florida, Youre getting these meaningful rate increases, but customers are shifting their deductibles.
And you've got some moving over to citizens in Florida.
Is this when we think about the organic growth impact of that kind of dislocation does this.
A good organic growth environment or are you getting faster growth in these markets because of that dynamic.
So let's back up and first say.
In California, and Florida, and you kind of alluded to this mark.
That there will continue to be pressure on the state funds or the state backed alternatives and the state of Florida I believe the number as of today as there are for takeout companies that have been downgraded by demo Tac and or wiped out one or the other.
When I say that.
Downgraded, meaning they are saying and filings. They don't believe they can continue on so that means theyre going down and so what you've got is you've got a lot of turnover and certain size homes in the state of Florida.
And so the governor had a special session and that they've got several items in the special session, but insurance was one of those topics.
So what our governor is trying to do and our CFO is to make Florida a very.
Have choice for consumers and be consumer friendly understanding that there are some hurdles that the carriers have had to jump over or through.
Regarding past losses, and our development of losses and or the future an aggregation of things here in the state of Florida. So.
What I'd say is as it relates to our teammates.
That work in the personal lines area, which is very important it's going to create more work for them. That's number one number two.
It becomes sometimes.
A little bit challenging because you have a very fine customer who has been with a carrier where they probably in the case of the ones that went down maybe under priced the account a little bit.
They're experiencing that customer higher than expected increases on their insurance.
Sometimes that leads to them potentially looking in other locations for insurance, but not exclusively and we think we can get to every market. So we try to bring all of the options.
Two of those customers does that create.
Some organic growth opportunities, yes, with a caveat so I would basically say, it's a neutral I don't I don't want to give you a thing that it's negative although it's harder on our team, but I also don't want to tell you. It's like a bonanza, either because it's not it's sort of up.
It's a neutral to slight positive, but there's you know.
Stuff that goes with that.
Yeah, Mark you know keep keep a couple of other things in mind on this one I know you just put out a big research report on the Cat property is and everything.
There's a number of different factors that go into ultimately what comes out is our commission revenue and so while the rate online in many cases is in fact going up as we mentioned in our commentary.
Got customers that are looking at deductibles.
And taking those up they've got they're looking at their total limits that they are purchasing in order to adjust in the case of citizens were paid a different commission rate than what we are to the other carriers. So there is a lot of factors that go into it. So just just because the rate online might go up 15% doesn't mean that our commission revenue.
It goes up 15% in inside of there. So just trying to keep all of those.
Consideration when thinking about the opportunity in the marketplace.
Yes, thanks for that detail you mentioned on the national programs, one of the EBITDA impact was from timing of revenue.
Does that become more favorable at some point in the near term here.
Yeah.
Yes.
Over the year that works out in one of the comments in there that we made mark was just.
Onboarding of customers and we've talked about this in previous calls is that generally when we bring on new customers. We're hiring teammates in advance to get them trained and start to to prepare to get the account onboard and then as the revenue start to to.
To come into the P&L and then it catches up so nothing unusual but when you have sometimes when you look at individual quarters. They can move around.
So this was a more of a negative quarter.
To balance out and be more positive at some point in the future.
That's probably a fair comment yes.
Thank you very much.
Thank you Sir.
Moving on to Western Bloomer with UBS.
Hi, Good morning, one of the things you guys touched on in the prepared remarks was on.
On the geopolitical matters and the impact that could have on growth I was hoping you could provide additional context on.
That in context to your guidance around the March 'twenty, two M&A, maybe expand on any potential indirect or direct exposures and just help frame. The conservatism those may be built into that.
Understanding you can't get into specifics, but.
He noticed any slowdown in.
In the U K or eurozone.
And related exposures.
Right so to the best of our knowledge, we don't have any exposures in Ukraine or Russia.
Whether that be currently or anticipated with the announced acquisition.
Subject to approval by FCA, that's number one number two.
What we would say is the impact that we've seen at least through the first quarter.
Is what I would call general inflationary pressure, maybe even consumer pressure not unlike what we see here west and in the United States. So that could be increases on food prices increases on gas prices things like that from an exposure unit standpoint.
We have not seen a slowdown in the first quarter.
And so.
We we believe that will continue and so remember there is a balance with what I call general inflationary pressure the negative is the your cost of goods.
Go up gas food clothing, whatever the case, maybe the flip side of that is your insureds. If their exposure units are based on payrolls or sales. If the sales price goes up that could offset slightly the premium paid if the <unk>.
<unk> go up that could impact the premium paid when you have wage inflation.
So.
Based on what we've seen so far we think that as I said it would be similar to what we've seen here in the United States from an.
And inflationary standpoint, that's how we would answer that question.
Great. That's super helpful and my follow up is I guess on the broader pace.
And a lot of across your portfolio in the past you've done around.
20 ish deals per year, just curious on the pipeline you are seeing from here is that roughly around the same level that we should expect for 2022 or could it potentially be lighter given the recent large scale M&A just curious on what youre seeing by size multiple type of deal.
Yes, so western I wouldn't get.
I wouldn't get focused so much on the number of transactions I think that might I don't know if thats going to yield the outcome you want.
What what I would tell you is we generally will not generally we focus on cultural fit and when and why people sell is different and so what I would tell you you can go back and look at our five year average or 10 year average on revenue acquired.
That number is somewhere around $135 million a year, but there's going to be certain years. This year would be one of them that it will be higher than that.
Subject to the approval and closing of those transactions that we've talked about but I want you to understand that each deal stands on its own.
So the fact that we have done our announced the large transaction does that dramatically impact our ability or interest in acquiring a nice firm sized firm here in the United States and the answer is no. It doesn't those are two totally separate decisions about how we.
Invest in the business and we like to think we can do both.
So I wouldn't I wouldn't want to focus you on number of transactions and we don't know how much we're going to do when we start the year.
Obviously, what we've announced.
<unk> is much more than a $135 million so far subject those being approved but we have.
Lots of opportunities that we're talking with but we don't know when and if those will close and we don't talk about the pipeline because the pipeline isn't what we buy the pipeline or the opportunities to buy and so it's ultimately what we close and you'll know about those when we close them.
Hey, Wes it's Andy.
Western I think maybe other side of the question that you might be asking is are we out of the M&A market and can we just say definitive we're not out of the M&A market.
Do have and we had this in our prepared comments, we do have adequate capital to continue to buy really good businesses. This year.
We also anticipate that we'll be able to delever. The organization. After these transactions. So we feel really good with where we are question is just when do the businesses.
Kind of lineup for the sale and they're just they're not consistent by quarter for us because of that cultural alignment.
Great. Thank you really appreciate all the color.
Thanks Ross.
And as a reminder, start wondering if you have any question, we'll now move to you Rune Qunar.
<unk> with Jefferies.
Thank you good morning.
Maybe a continuation on the M&A.
Front so.
If valuations remain elevated at this point.
How are you thinking about team hires as another option to bring people in as opposed to outright M&A.
Maybe you can help us think about the.
Pros and cons of it and when you'd prefer <unk> over.
Purchasing a business.
Well it.
I think the way I would.
Articulate that you're on is any time that we find good people.
We would consider hiring them it doesn't have to be at this type of cycle.
So we.
We have not done.
A number of what you might call team lift outs that is not how we've.
Built our business.
And so that doesn't mean that there aren't people that we would consider hiring and if the right people wanted to do something we would.
Consider a way to structure it but we don't want.
We have contracts that we want.
Our people, we abide by the contracts and we don't ask somebody to violate contracts when they come to Brown <unk> Brown and so we expect others to abide by those contracts. So if people want to come or if people want to leave than they can.
And so we're we're really mindful around that we don't take the actions.
<unk>.
You know we go into it with a legal mindset, where it's going to be a legal battle, that's not the way we build our business we.
Try to do it on the up and up and we basically if somebody wants to come onto the contract that you had with your prior employer and let's go before and write new business and then if in fact you have covenants then once those covenants expire then if you want to go back after that business you can.
Okay. That's helpful.
And then on a totally different topic or going back to Lisa's question in the beginning of the Q&A.
You had flat margins in the first quarter.
It sounds like Youre, saying second half of the year, you could see a little bit of alleviating pressure on the margin side.
You are maintaining the overall full year guidance.
Flattish margins.
Sure.
What are the headwinds that youre seeing or is that you potentially see that could offset some of the margin expansion in the second half of the year is it just slower have you flown on an airplane lately.
Have you flown an airplane.
I know you have so the point is did you see how much you had to pay for that ticket.
Yes.
Okay. So the cost of a hotel room, the cost of a rental car the cost of an airline ticket the cost of the gas to put in the rental car, particularly if you go to places like California, where it's $5 $6, a gallon and and I'm not trying to be flippant, I'm basically trying to say that.
There are there's pressure on all of these inputs and so.
I think quite honestly that our margins are really good.
And we're really pleased about where our margins are.
<unk>.
If we deliver flat margins as we said at the end of the year I think that'd be pretty darn good under the circumstances, but theres a lot of variability in terms of costs that are beyond our control that does not mean, you're on that we're saying that we're going to have everybody back traveling exactly like they do.
But if you took six people to see a client and now you take two but if it cost two or three times as much to get the two people there that kind of offset a little bit.
So that's what I would say relative to.
The margin profile and by the way.
If we exceed if we over perform the flat that's great. If we underperformed slightly that's alright too. The thing is is we are growing our business organically and profitably and more importantly, we're converting that into cash and reinvesting it in our business so cash conversion.
We've talked about this for a long time, we think is important.
No you do but I think it's we think it's really important particularly in the amount that we convert relative to others convert and our ability to use that cash and invest in our company.
Got it thanks, so much for the comments.
Thanks, Ron.
We will now move to Derek Han with a B W.
Good morning, Thanks, just looking at.
The investment income.
Can you just talk about what interest rates matter the most.
Would have expected an increase but it looks like it didn't change all that much.
That's why I'm asking.
Yes, Hey.
Good morning, Derik, Andy here, probably two ways, maybe for you to think about that let's talk about on the interest income side as you probably saw for the quarter and we generated about $100000 of net interest income so the movement in interest rates.
We'll probably not have a material upside on interest income because theres a lot of factors that go into the net earning of that because of restricted accounts and bank fees et cetera inside of there. So I think maybe that's one way to target and then when you look at the debt side of things is we'll have.
In the range of about 1.2 billion $1 25 billion of floating rate debt out. There. So you can get a pretty good idea of kind of what every 1% increase does on there. We think we're well positioned between fixed and floating in order to optimize the interest rates that are out there and.
As it relates to the guidance that we gave on the $17 million. We've incorporated our thoughts in there is to probably what will happen with rates over the coming year.
Got it that's really helpful and just had another question on contingents and it looks like the programs can then contingents were down a little bit only modestly but the wholesale contingents were actually up can you just talk about whats driving that why the different direction year over year.
Yeah. So let's talk about programs first is those are the ones can be more volatile in nature and is to explain the reason why on that is because they are tied to individual programs and profitability and volumes. Those can just move up and down and we've seen that over time, so nothing unusual inside of there nothing thats.
Changed from a fundamental standpoint in the business and then on the wholesale side is it's it's good to see that theyre up a little bit, but we don't think that we're out of the woods and that contingents theyre going to start going up.
Been down for quite a few years, because overall profitability at the carriers. So good to see up a little bit, but that's only one quarter and some of Thats just some true ups from the accruals that we made in the previous year. So nothing real unusual there at this stage.
Got it thank you for all the answers.
Thank you.
And we have a follow up from Mark Hughes tourists.
Yes. Thank you any update on the social security advocacy business.
The answer yes.
What I would tell you is.
There continues to be.
You know it seems to be slowing down or continuing to be slow in the processing of those claims and I don't we don't see in the near term near term, meaning the next quarter or two that changing at all so as I like to say.
There there continues to be a backup.
But.
<unk>.
Things and claims to be processed, but I don't see the way to clear the pipe.
Efficiently in the near term so we don't have.
Significant update on that and do you have anything else on that and maybe think about it in two ways. One is the inflow into the business and we mentioned this on some previous calls we're very very pleased with the with the volume of potential claims coming to us and the relationships that we have with all of our customers. So.
Inbound is good so that's an important thing for us as to how we look at the business. Then the question is.
The number that ultimately get processed by the social security administration, and Thats kind of the other end of the funnel that just has a constraint on it with the.
The number of.
Employees that they have there the administration, so it's kind of at a call.
Call it somewhat level.
As to where it was about a year ago, but at least right now we don't see anything that's going to.
Cause us to believe that theyre going to add more resources in the SSA in order to increase the volume, but we've seen this in the past though.
We really have and it goes in a cycle and then there is there is a backlog there and then all of a sudden there'll be some sort of noise that will happen and lo and behold they'll put additional resources in it clears out so just kind of come in waves, but the overall health of the business is very good we just wait for wafers come out on the backend and it's a cycle.
Yes. Thank you for that and then one final question.
I don't think you've addressed this directly on this call, but the duration of the P&C cycle you describe your outlook for rates.
To be largely steady it sounds like at least for the near term.
Steady and steady increases.
And that may be a little more optimistic than some of these calls in the past.
Any thoughts on the duration of the cycle, what you might have seen here recently that influences your view on the durability of the cycle.
Okay. So let me let me clarify.
Range is and what you just said so we're clear.
If you say the rate increases range from 3% to 7% and all of a sudden the majority of them are six and then in the next quarter. The majority of them are five or four and a half that is a slight moderation in rates. Okay. So.
Do we anticipate the rates being in the similar range to what we said, yes, we do but I want to make sure that you understand that theres a range. There. So I actually say in most classes of business, we're seeing slight moderation in rates, but in the same range that number one.
Number two mark I've only been in the business 32 years and so in my 32 years I've not seen anything like what we're in today.
So you've read all of the other reports on the carriers and they start talking about loss costs are up their profitability is up but you have the involvement of significant claims awards outside the so called normal if you want to call that whatever you want to call those huge verde.
<unk>.
You are also seeing.
Just in terms of jury's, particularly in certain areas of the country being very sympathetic the claimants and so.
The carriers are looking at all of that and I think the carriers are also.
Doing a better job.
And.
Disciplined underwriting that does not mean, that's going to go on forever, but there is that you know.
At a certain point, we're going to get to what a friend of ours calls the cheating phase in the cheating phases, where people start undercutting pricing and so I don't think thats going to happen tomorrow, but thats coming now there's one caveat that we touched on but I would like to expand on for them.
Moment, you put a big hurricane into Florida.
That makes the market here in Florida significantly different and it's not easy today. So that's number one number two you put a big earthquake into California that changes the dynamic of earthquake insurance and particularly not only the people that buy it but.
The rates that are charged.
What I would say is in the event that there are no major natural disasters I'm not talking about wind storms and tornadoes, which are tragic and things like that I'm talking about a big hurricane coming into Texas, Florida, Louisiana bigger quake without that.
You will continue to see pricing moderation.
If you do see that in any one of those areas any one of those areas could go into.
Very chaotic insurance market.
So I don't know exactly helps you or hurts, you, who but I hope it clarifies.
Our view on.
And by the way.
I think that.
We're going to be if you asked me, which you didn't exactly what's it look like for the rest of the year I think it's slight moderation.
Subject to any big natural losses.
I appreciate the clarity thanks Paul.
Right.
Alright, I think we have one or do we have one more question more than that what do we what do we have Jake.
We have a couple in the queue.
Question from Michael Phillips of Morgan Stanley .
Okay.
Thanks for putting me on just one from me guys up specifically on the National program, you've been pretty clear that replicate in the prior two years of 12% or 2% organic is not on the cards obviously.
But can you.
Without trying to give specific numbers just help us remind us of things to think about for how the rest of the year could play out if we compare the rest of the year to kind of that 6% that you did in this quarter.
Alright, so Michael as Powell think about.
National programs.
As.
A couple of buckets one of those buckets is let's say catastrophic exposure.
When the like so your ability to grow in that market is going to be dictated by the availability of capacity.
So if you don't get new capacity, you will have potentially slight increases on your existing book, but you will not write new business and if some of that moves to another market then that moderates your growth. So what I want you to think about is a.
<unk> of National programs is dependent on.
Capacity.
One to think about what Andy said earlier in our.
Loan tracking business you have a business where you have several portfolios that were sold in a quarter. We didn't know when the portfolios are going to be sold just like we don't know when the portfolios are being purchased so that can that can go both ways. It was a little bit of a negative this.
Quarter, if one of our clients bought a bunch of portfolios in the second quarter.
Then or the third quarter, we could have a slight uptick.
Then I want you to think about a big part of our national programs as flood. Okay. Flood just went through a re rating it's 2.0.
So that's a nice way of saying certain flood zones were re mapped.
There were certain things that were charged that maybe werent charged before or they are charging less for them now so in the event that nothing has changed and you your flood insurance goes up significantly.
Significantly some people might might living in a flood zone consciously decided not to buy a flood.
Now I know that sounds hard to believe but the answer is they might.
So the rest of our national programs would be those that are let's say casualty driven so we have a dental program as an example, and we write dentists through administrators around the country and Thats the professional liability on dentist. So is there a law.
Lot of rate pressure on dentists well.
Im not aware of that I mean, your professional liability exposures did you pull the wrong too.
Did you did someone get.
Infection in their mouth, something that's large and somebody slip in the hallway on the way to the dental chair, but the performance of that program has been pretty good over time, but there are lots of other people that want to write that class of business.
So that's a long winded answer Michael on saying that.
The portfolio of businesses in National programs is very indicative of an insurance company that we don't bear risk in that is how you think about it. So remember we are underwriting on behalf of our carrier partners and we have to make them money so depending on.
Whichever bucket.
Referring to that I, just outlined they each have different pros and cons going into the year.
The rest of the year, that's how I'd describe it.
Okay. Thank.
Thank you that's very helpful. Appreciate youre talking the plan yes.
Have a nice day.
This will be our last question.
We have one final question in the queue, we'll hear from Elyse Greenspan for a follow up from Wells Fargo.
Okay. Thank you Andy.
Randy My question.
When you guys again TRP deal that you gave us a low and high case on the financial.
This expense theme, it's modestly higher I'm, assuming everything else stays in place and that will.
We'll kind of update that.
The deal closed, but any kind of update you can give us now.
Not at this stage I think you're spot on at least once we get the deal closed, which again were anticipating for both <unk> as well as BBB in sometime during the third quarter.
And then what we'll do is we'll make any applicable updates for projections. Once we just have more information again, we can only get so far since we.
Don't own the business, yet so we'll adjust accordingly, and the interest rate it is up a little bit, but probably still within the overall ranges that we gave.
And then for the integration.
I know I think they will incorporate this quarter will they continue I know you're backing out of adjusted in the margin, but will they remain with incorporate even after the deal close or when will they hit.
The retail segment.
Yes, if you look in the back of the earnings deck, we've actually got a schedule in there that breaks it down by each of the divisions. So we did have cost in and more than other or corporate and going forward. They may be in different places, but the schedule will be able to break that right out for you a nice and clearly.
Okay, great. Thanks for the color.
Yes. Thank you.
That'll be it. Thank you all very much.
I wanted to let you know that we're very excited about our performance in Q1 and look forward to another good performance in Q2.
We're very pleased with the outlook on the business the margin profile of the business the M&A opportunities and most importantly, all of our teammates as I said, we have just over 12000 teammates today going to just under 15000, when we close the BBB and <unk>.
<unk> deals. So we look forward to talking to you at the end of next quarter, you'll have a nice day and thank you for your time.
And with that ladies and gentlemen, this does conclude your conference for today, we do thank you for your participation and you may now disconnect.
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